In my earlier post, I commented that one reason a number of foreign oil fields may be "peaking" is not necesarily because they are hitting their production limits, ala "peak oil theory," but because state run companies tend to be terrible at making the intelligent long-term investments that are needed to maintain oil production in aging fields. I observed:

There are a lot of things you can do to an aging oil field,
particularly with $60 prices to justify the effort, to increase or
maintain production. In accordance with the laws of diminishing
returns, all of them require increasing amounts of capital and
intelligent management.

Unfortunately, state owned oil companies like Pemex (whose assets,
by the way, were stolen years ago from US owners) are run terribly,
like every other state-owned company in the world. And, when
politicians in Mexico are faced with a choice between making capital
available for long-term investment in the fields or dropping it into
yet another silly government program or transfer payment scheme, they
do the latter. And when politicians have a choice between running an
employment meritocracy or creating a huge bureaucracy of jobs for life
for their cronies they choose the latter.

So today, via Hit and Run, we see this exact same effect in Venezuela:

No one sees an immediate crisis at PetrÃ³leos de Venezuela. But its
windfall from high oil prices masks the devilish complexity and rising
costs of producing heavy oil. Meanwhile, the company acknowledged last
month that spending on "social development" almost doubled in 2006, to
$13.3 billion, while its spending on exploration badly trailed its
global peers. And PetrÃ³leos de Venezuela's work force has ballooned to
89,450, up 29 percent since 2001 even as production declined...PetrÃ³leos
de Venezuela's cash is said to be running short as Mr. ChÃ¡vez uses its
revenue to cement political alliances with Bolivia, Cuba and Nicaragua.
The company has borrowed more than $11 billion since the start of the
year, a rapid debt buildup that reflects a wager by Mr. ChÃ¡vez that oil
prices will remain high indefinitely.

One Comment

Jim Collins:

So what happens when the bottom falls out of the oil market? It is going to happen, last year convinced me of that. When the oil prices peaked last year it kick started the "alternative energy" boom. For how many years were sources of alternative energy discarded because they were not cost effective, when compaired to oil? There is even serious talk about building new Nuke plants in the US, something that would have been unheard of 10 years ago. One thing about the US being the world's biggest consumer of energy, it also gives the US the biggest amount of control over energy issues.